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December 12, 2022 12:00 AM

Political fight against ESG continues in 3 states

Kentucky, Florida, N.C. latest to attack ESG, but pension plans not following

Rob Kozlowski
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    David Adkins
    Council of State Governments’ David Adkins: ‘It is clear like critical race theory that ESG is now the flavor of the month for being a punching bag in the culture wars, and we don’t have to accept that framing of the issue. ESG is not the enemy.’

    Politicians in Kentucky, Florida and North Carolina have continued a crusade by Republican leaders for pension funds to break with ESG and BlackRock. While several state treasury funds have dropped BlackRock from investments, pension plans have been less willing to follow.

    In Florida, Chief Financial Officer Jimmy Patronis terminated BlackRock from the management of $2 billion in the state's long-duration portfolio and called on the Florida State Board of Administration, Tallahassee, to drop BlackRock from more than $13 billion in pension plan portfolios.

    North Carolina Treasurer Dale Folwell on Dec. 9 called on BlackRock CEO Laurence D. Fink to resign, citing the "chaos, fussiness, wacktivism" promoted by Mr. Fink and others

    Two Kentucky retirement systems have chosen to reiterate their existing investment policies to two state officials who are seeking confirmation the systems do not integrate ESG considerations into their investment management decisions.

    The two boards overseen by the Kentucky Public Pensions Authority, Frankfort, have approved letters in response to the requests from state Treasurer Allison Ball and Attorney General Daniel Cameron, who are both Republicans.

    The Kentucky Public Pensions Authority oversees the $7.9 billion County Employees' Retirement System, as well as the Kentucky Retirement Systems, which consists of four other state pension funds with a total of $4.6 billion in assets. CERS and KRS have separate boards of trustees that vote on investment decisions.

    In an Oct. 31 letter from the state officials to David Eager, KPPA's executive director, Ms. Ball wrote that she had recently asked Mr. Cameron whether investment practices integrating environmental, social and governance practices are consistent with Kentucky law "governing fiduciary duties owed by investment managers to Kentucky's public pensions."

    According to the letter, Mr. Cameron said "such practices violate statutory and contractual fiduciary duties." The letter further requested that Mr. Eager advise Mr. Cameron's office about his systems' efforts to ensure that "ESG considerations are not being implemented in your systems' investment decisions, consistent with Kentucky law."

    The investment committees of both systems had previously approved a two-page joint letter reiterating the investment policy statements. In a Dec. 1 board meeting, the Kentucky Retirement Systems' board voted instead to delegate the authority to KRS CEO John E. Chilton to draft a separate letter thanking the officials for their letter and simply referring them to the KRS investment policy.

    In a webcast of the meeting, Mr. Eager said, "We do not apply ESG rules to eliminate broadly companies, like all oil companies or tobacco companies or whatever. Some of those factors do come into play in typical ongoing analysis of any equity securities, so if they have violations or concerns or their practices that we think are going to diminish the financial profitability, we'll take it into consideration but other than that, we … don't apply those standards broadly."

    In the ensuing discussion, trustees began to question the need for a two-page letter, which included information regarding the systems' proxy-voting policies.

    "I would just commend our staff for the reasoned and appropriate approach that they take in the letter. I completely agree with (C. Prewitt Lane, vice chairman of the board) that in these cases we're being asked to be parties to the politicization of an issue that doesn't really involve us, and I would encourage us not to engage any more than we absolutely have to," said David Adkins, trustee with the board and executive director/CEO of the Council of State Governments. "It is clear like critical race theory that ESG is now the flavor of the month for being a punching bag in the culture wars, and we don't have to accept that framing of the issue. ESG is not the enemy. It is not the devil waiting behind the corner. It is an attempt to say that investing decisions and bottom-line definitions of returns can consider something more than just dollars on a spreadsheet. And I think in the world in which we live, and the risks we confront and very real challenges that those risks present to us that those companies and those investment firms that choose to pursue ESG policies should not be vilified, nor should we necessarily feel like we have to enter into that debate."

    Mr. Adkins said that if ESG results in better returns for the systems' beneficiaries, then "by God, we want that to be one of the tools in our toolbox. So I don't mean to tell anybody to go pound sand, but we just don't need to be caught up in what is going to increasingly be one of a litany of issues that are grievance-based that have nothing to do with solving problems of advancing the interests of our beneficiaries."

    "I would have (sent) a very short and sweet letter back to the AG thanking him for his input and that we got this," Mr. Adkins said. "This is a political, pure political issue that has nothing to do with the merits of it. And I don't need to be drug into that."

    Mr. Eager responded, "I couldn't agree more, and I've been fighting this battle for 30 years."

    At its Dec. 5 meeting, the County Employees' Retirement System's board approved the draft letter included in meeting materials, according to a webcast of that meeting.

    In the draft letter, Ed Owens III, CERS CEO, noted that the board at its Nov. 10, 2021, meeting amended its investment policy with a passage in which "the CERS Trustees recognize the importance of responsible investing."

    "Accordingly, the Trustees acknowledge that integrating Environment, Social, and Governance (ESG) policy principles that engage the issue from a risk, opportunity and fiduciary duty perspective will enhance investment results. The overriding consideration for the Trustees will continue to be investing to maximize the long-term returns for plan beneficiaries," according to the amendment.

    Related Article
    2 Kentucky pension plans defend investing policies against GOP backlash over ESG
    Florida takes further aim

    Mr. Patronis is taking his anti-ESG fight to the $217.5 billion Florida State Board of Administration.

    On Dec. 7, Mr. Patronis sent a letter to Lamar Taylor, interim executive director and chief investment officer of the board, saying he believes the board should "transition away" from BlackRock.

    In the letter posted on his website, Mr. Patronis reiterates the reasons he terminated BlackRock from the management of $2 billion in the state's long-duration portfolio and its short-term investment fund, saying "it's hard for me to imagine a scenario where the SBA can continue its partnership with BlackRock. There are other firms in this space and BlackRock is not entitled to our pension funds."

    In a Dec. 1 news release, Mr. Patronis announced the termination of BlackRock due to what he terms as Mr. Fink's "campaign to change the world" in utilizing ESG standards.

    BlackRock is the sole manager of the $600 million short-term investment fund and manages $1.4 billion as one of 12 managers in the state's Treasury division long-duration portfolio.

    Mr. Patronis has not said whether other managers who have publicly expressed support for ESG investing will also be terminated, and Devin Galetta, his spokesman, has not replied to requests for further information.

    Among the 11 other external managers in the long-duration portfolio, 10 managers are listed as signatories to the United Nations Principles for Responsible Investing on the U.N.'s website. The first of those principles is: "We will incorporate ESG issues into investment analysis and decision-making processes."

    Two managers, Amundi and Insight Investment, are also signatories on the Net Zero Asset Managers initiative.

    Mr. Patronis sits on the Florida State Board of Administration along with Gov. Ron DeSantis and Attorney General Ashley Moody.

    BlackRock is currently an underlying manager for the FRS U.S. Enhanced Bond Index Fund and FRS Inflation Sensitive Fund, two white-label investment options offered by the $12.3 billion Florida Retirement System Investment Plan, a defined contribution plan.

    SBA spokeswoman Emilie Oglesby said in a Dec. 1 email that BlackRock manages about $13.2 billion for the Florida Retirement System pension fund.

    Related Article
    Florida CFO calls on state pension fund to terminate all BlackRock portfolios
    North Carolina joins in

    In an interview Dec. 9, Mr. Folwell, a Republican, said the call for Mr. Fink's removal "is not personal, it's mathematical."

    Mr. Folwell cited his fiduciary duties as sole trustee of the $111.4 billion North Carolina Retirement Systems, Raleigh, and chairman of a state banking commission and local government body that issues debt for his criticism of the "chaos, fussiness, wacktivism" promoted by Mr. Fink and others.

    "All the energy that's been spent these last months and years have put us in conflict. Today I feel very liberated that I have fulfilled my fiduciary duty to our members," Mr. Folwell said.

    Mr. Folwell recently signed an agreement allowing the pension system to vote shares managed by BlackRock instead of the asset manager. "We are going to do that anywhere we see" similar activism by asset managers, he said.

    "I hope BlackRock itself gets liberated from Mr. Fink," the treasurer said.

    NCRS has $14 billion invested through BlackRock in mostly passive funds, plus $55 million passively invested in BlackRock stocks or bonds.

    Hazel Bradford contributed to this story.

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